The UAE recently passed Federal Decree Law No. (16) of 2021 (“Decree”) which comes to regulate the factoring and the assignment of accounts receivable, the practice of which was regulated under the Civil Code. The Decree addresses the assignment of accounts receivable (“Assignment”) and regulates the relationship between the assignor (“Assignor”), assignee (“Assignee”) and the Assignor’s debtor (“Debtor”). Moreover, the Decree outlines that any factoring activities require a license from the Central Bank.

Regulating Factoring

Whilst factoring is not heavily addressed throughout the Decree, the regulation impacts a widespread practice in the market. Factoring allows businesses to sell their invoices to third parties at a discounted price, facilitating cashflow and bypassing long waiting periods commonly associated with the payment of invoices, and increases finances for trade.

In a market supported by factoring and receivables finance structures, this brings with it challenges constantly faced by financiers, insurers and customers worldwide; the Decree calls for such debtor finance practices to be exercised solely by licensed institutions in an attempt to combat money laundering practices.

Although factoring practices by unlicensed parties may not cease to exist overnight and such practices may indeed continue; if a dispute arises between the parties, for example in terms of payment by the debtor or by the third party, the courts may nullify the arrangement declaring it contrary to the law.

Assignments of Accounts Receivable

The scope of the Decree extends to Assignments within civil and commercial transactions, but excludes, inter alia: personal or household related transactions, foreign exchange transactions, and rights to payments by documentary credits and letters of guarantee.

The Decree generally permits the Assignor, Assignee and Debtor to agree on the provisions governing the rights of each and allows the Assignor to give certain undertakings in relation to the Assignment, including undertakings that the Debtor waives his right to defenses. Therefore, we expect more stringent requirements from banks and financial institutions, for example, in terms of requesting Assignors to include waivers of defense clauses in the terms of the original agreement between the Debtor and Assignor (“Original Contract”), on behalf of Debtors.

It is expected that registrations of Assignments in the Emirates Movable Collateral Registry (“EMCR”) will increase as registration provides Assignees senior status as to the collection of the receivables.

The Decree now outlines the means of enforcement against receivables as agreed between the parties or per Law No. (4) of 2020 on the Security of Moveable Assets, thereby allowing Assignees to enforce the Assignment directly rather than through litigation. As clearer processes of enforcement against Assignments have been mapped out by law, it is an expectation that more enforcement actions will also arise.